This invention relates generally to assessing underwriting and distribution risks associated with subordinated debt, and more particularly, to network-based methods and systems for assessing a value at risk for a subordinated debt warehouse in the case of a liquidity event.
Commercial lenders generally engage in the business of lending money or capital to borrowers such as other business entities. Commercial lenders may lend such capital to a borrower by issuing a loan to the borrower which the borrower must pay back at a certain rate and over a certain period of time, or by purchasing a bond (or other debt instrument) from the borrower. A bond is a debt security, in which the authorized issuer (i.e., the borrower) owes the holders a debt and is obliged to repay the principal and interest (i.e., the coupon) at a later date, termed maturity. In other words, a bond is simply a loan, but in the form of a security. The issuer is equivalent to the borrower, the bond holder to the lender, and the coupon to the interest. Bonds enable the issuer to finance long-term investments with external funds.
Accordingly, business entities will oftentimes issue debt instruments such as bonds to borrow money for financing or expanding their business operations. These business entities are referred to as borrowers. The most common process of issuing bonds is through underwriting. In underwriting, one or more securities firms or banks, buy an entire issue of bonds from an issuer and re-sell them to investors. In other words, a borrower may use an underwriter, also known as a commercial lender, to issue bonds for raising money for the borrower. The bonds will be issued by the borrower to the underwriter. The underwriter purchases the bonds at a certain amount and provides certain underwriting services to the borrower. The fees associated with these underwriting services are in turn charged back to the borrower.
In most cases, shortly after purchasing the bonds from the borrower, the underwriter attempts to re-sell or distribute the bonds to investors. In the case of high yield bonds or mezzanine bonds, the bonds are not secured by collateral and are referred to as subordinated debt because such bonds are subordinate to other debt (i.e., in the case of a foreclosure, the primary or secured debt is paid first, and the subordinate or unsecured debt is paid last, if at all). In such a case, prior to distributing the bonds to investors, the underwriter is typically considered a holder of an unsecured or subordinated debt in the borrower. In other words, if a liquidity event occurs after the underwriter purchases the bonds and before the underwriter is able to re-sell the bonds to the investors, the underwriter may suffer a loss on the deal because there is no guarantee that the underwriter would be able to re-sell the bonds at an amount that will cover the purchase price of the bonds and because such bonds are not secured by collateral owned by the borrower. Accordingly, while the underwriter owns these high yield bonds (i.e., before the bonds are sold to investors), the underwriter is at risk for losses relating to the bonds.
In at least some known cases, underwriters will have a portfolio of underwritten deals and will also be evaluating other deals to underwrite. For example, an underwriter may have already underwritten bonds for Company AAA, Company BBB, and Company CCC, and may be considering underwriting bonds for Company DDD. Thus, before the underwriter is able to re-sell the bonds in its portfolio to investors, the underwriter may own bonds issued by Company AAA, Company BBB, and Company CCC, and may also be considering purchasing bonds from Company DDD. In such a case, the underwriter may have a significant amount of money at risk if a liquidity event were to take place before re-selling these bonds.
Accordingly, it would be helpful for an underwriter to be able to calculate with certainty a Value at Risk (VAR) for a portfolio of unsecured and/or subordinated bonds that the underwriter had underwritten but had not yet re-sold to investors. It would also be helpful for an underwriter to be able to determine how a bond issuance the underwriter is considering underwriting would affect the VAR for the underwriter's portfolio of unsecured and/or subordinated bonds.